FAIRFIELD COUNTY, Conn. — As the U.S. stock markets kicked off the New Year with a sharp drop, it left many Fairfield County investors worried.
The Dow Jones industrial average declined as much as 467 points during the trading day Monday before closing down 276 points. Should investors continue to hold stocks?
“If they’re comfortable with the variability of returns, absolutely,” Joseph Matthews, a senior vice president at Morgan Stanley’s Fairfield office, told the Daily Voice Tuesday.
Monday’s Dow performance was hardly an aberration. On Aug. 24, 2015, the Dow Jones declined more than 1,000 points at the opening and closed with a loss of nearly 600 points.
Experts called that drop a “correction.” The market has since bounced back.
That’s the tradeoff with investing in stocks compared with bonds, experts say. Investors endure short-term abrupt changes in value in exchange for a long-term reward.
“Over the long term, stocks tend to do better than bonds,” Fairfield University Professor Michael Tucker told the Daily Voice at the time . “Over the short term, it's a very bumpy ride.”
Matthews echoed this sentiment, explaining that investors should consider their investment goals and their comfort with volatility when investing with stocks.
“The first thing (investors) need to do is make sure their portfolio is aligned with their investment time horizon, their tolerance for risk and their need for liquidity,” Matthews said. “If somebody is saving for retirement and the investment time horizon is 20-plus years, they have the ability to weather short-term downturns in the market and take on higher levels of risk in order to achieve higher rates of return.”
To reduce the short-term changes in value, Matthews looks at investing in foreign markets — either through stocks or funds — to keep portfolios diversified. Many U.S. investors gravitate toward “U.S.-domiciled companies,” he said, but he sees opportunity moving forward in Europe and Japan.
As in August, concerns over China’s economy helped fuel Monday's drop. But it may have been fueled by another factor as well: Investors may be concerned with the breakdown in diplomatic relations between Saudi Arabia and Iran, two of the larger producers of oil in the world, Matthews said.
After the August drop, investors became concerned. Tucker, at the time, said, “The panic is not justified. I think that things will come back.”
Time will tell if that will be the case again.
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